Unrelated Business Income

Feb 15, 2021
Tax and Accounting

Welcome to Life Designers' comprehensive guide on recognizing unrelated business income in your nonprofit organization. As a leader in the field of life design consulting and coaching, we aim to provide valuable insights and expert advice to help your nonprofit thrive. In this article, we will navigate the complexities of unrelated business income and offer practical tips to ensure compliance and success.

Understanding Nonprofit Unrelated Business Income

Nonprofit organizations play a crucial role in society by addressing important social, educational, and cultural needs. However, to sustain their operations and fund their missions, nonprofits often turn to generating revenue through unrelated business activities. While generating income through unrelated activities is generally permissible, nonprofits must be cautious about the potential tax implications of such activities.

Unrelated business income (UBI) refers to income generated by a nonprofit organization that is not directly related to its exempt purpose. This income can originate from activities such as the sale of goods or services, rental income, advertising revenue, or certain investment activities. It is essential for nonprofits to recognize and properly report UBI to maintain their tax-exempt status and avoid penalties.

The Importance of Identifying and Reporting UBI

Recognizing and reporting UBI accurately is crucial for several reasons:

  1. Compliance: Nonprofits must comply with the Internal Revenue Service (IRS) regulations and guidelines regarding UBI reporting. Failure to do so can lead to penalties, loss of tax-exempt status, and reputational damage.
  2. Tax Implications: UBI is subject to income tax, and if not reported correctly, a nonprofit may face additional tax assessments, interest, and penalties.
  3. Transparency: Properly reporting UBI demonstrates transparency to stakeholders, including donors, grantors, and the general public. It builds trust and credibility, enhancing your nonprofit's reputation.

How to Identify UBI in Your Nonprofit

Identifying UBI can be challenging, as it requires a thorough examination of your organization's revenue streams. Here are some steps to help you determine if your nonprofit has unrelated business income:

  1. Evaluate Revenue Sources: Review all sources of income, including fees, sales, sponsorships, royalties, and rental income. Identify any activities that do not directly align with your tax-exempt purpose.
  2. Substantiality Test: The IRS considers whether the activity in question is substantial in relation to the overall exempt purpose. If a particular activity constitutes a significant portion of your organization's revenue, it may be classified as UBI.
  3. Regularly Carried On Test: Determine if the activity is regularly carried out. Nonprofits may engage in sporadic or occasional activities that are not considered UBI. However, if the activity becomes a regular and continuous source of income, it may fall under UBI.

Reporting UBI to the IRS

Once UBI has been identified, it is crucial to report it accurately to the IRS. Nonprofits must file Form 990-T, Exempt Organization Business Income Tax Return, to report and pay taxes on UBI. This form ensures compliance with tax regulations and enables the IRS to assess the tax liability associated with unrelated business activities.

It is advisable to consult with a qualified tax professional or engage the services of a trusted life design consulting and coaching firm like Life Designers to navigate the complexities of UBI reporting. Working with experts can help ensure accurate reporting and minimize the risk of errors or omissions.


Recognizing unrelated business income is crucial for the long-term success and sustainability of nonprofit organizations. Compliance with IRS regulations and accurate reporting are essential to maintain tax-exempt status and uphold transparency. As a leading provider of life design consulting and coaching services, Life Designers is committed to helping nonprofits thrive and achieve their missions. We hope this guide has provided valuable insights to assist your organization in navigating the complexities of UBI. For personalized assistance and expert advice, feel free to reach out to us.